<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended December 31, 1997
-------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number 0-22210
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SUMMA FOUR, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0329497
(State of Incorporation) (IRS Employer Identification Number)
25 Sundial Avenue, Manchester, New Hampshire 03103
(Address of registrant's principal executive office)
(603) 625-4050
(Registrant's telephone number)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
Common Stock, $.01 par value 6,601,697
Outstanding as of January 24, 1998
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<PAGE> 2
SUMMA FOUR, INC.
INDEX TO FORM 10-Q
Page(s)
-------
Part I - Financial Information:
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of 1
December 31, 1997 and March 31, 1997
Condensed Consolidated Statements of Operations 2
for the three months ended December 31, 1997 and 1996
and the nine months ended December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows 3
for the nine months ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 4-6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
Part II - Other Information:
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of 13
Security Holders
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signature(s) 14
<PAGE> 3
FORM 10-Q
PART I
ITEM 1
SUMMA FOUR, INC. PAGE 1
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
----------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,360 $ 6,169
Investments - current 19,371 7,472
Accounts receivable, net 10,475 10,278
Inventories, net 4,663 5,069
Deferred income taxes 2,288 2,288
Prepaid and other current assets 3,899 1,812
-------- --------
Total current assets $ 42,056 $ 33,088
Investments - non-current 5,997 18,686
Property and equipment, net 5,279 4,265
Deferred income taxes 226 226
Other assets 598 188
-------- --------
$ 54,156 $ 56,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,351 $ 2,333
Accrued payroll and related expenses 930 1,016
Other accrued liabilities 2,916 3,704
Deferred revenues 2,808 3,075
-------- --------
Total current liabilities 10,005 10,128
Other long-term liabilities 740 676
Commitments and contingencies (note 5)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
1,000,000 shares -- no shares issued -- --
Common stock, $.01 par value; authorized
20,000,000 shares; issued 6,601,697
at December 31, 1997 and 6,411,762 at
March 31, 1997 66 64
Additional paid-in capital 44,187 43,662
Accumulated earnings 10,368 13,149
Cumulative translation adjustment (42) --
Unrealized gains (losses) on investments (9) 43
Treasury stock, at cost, 849,098 shares at
December 31, 1997 and 852,431 at
March 31, 1997 (11,159) (11,269)
-------- --------
Total stockholders' equity 43,411 45,649
-------- --------
$ 54,156 $ 56,453
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE> 4
FORM 10-Q
PART I
ITEM 1
PAGE 2
SUMMA FOUR, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $11,023 $11,624 $30,416 $32,795
Cost of revenues 4,945 4,906 14,636 13,004
------- ------- ------- -------
Gross profit 6,078 6,718 15,780 19,791
Operating expenses:
Selling, general and administrative 3,919 3,714 12,421 10,795
Research and development 2,902 2,500 8,551 7,528
------- ------- ------- -------
Total operating expenses 6,821 6,214 20,972 18,323
------- ------- ------- -------
Operating (loss) income (743) 504 (5,192) 1,468
Interest income, net 327 234 1,145 783
Foreign exchange gain (loss) (40) (49)
------- ------- ------- -------
(Loss) income before income taxes (456) 738 (4,096) 2,251
(Benefit from) provision for income taxes (146) 281 (1,311) 855
------- ------- ------- -------
Net (loss) income $ (310) $ 457 $(2,785) $ 1,396
======= ======= ======= =======
Basic Earnings Per Share
Income from continuing operations $ (.05) $ .08 $ (.49) $ .23
------- ------- ------- -------
Net income $ (.05) $ .08 $ (.49) $ .23
======= ======= ======= =======
Diluted Earnings Per Share
Income from continuing operations $ (.05) $ .08 $ (.49) $ .23
------- ------- ------- -------
Net income $ (.05) $ .08 $ (.49) $ .23
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE> 5
FORM 10-Q
PART I
ITEM 1
PAGE 3
SUMMA FOUR, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,785) $ 1,396
------- -------
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,005 1,765
Provision for doubtful accounts 115 150
Provision for excess and obsolete inventory 15
Changes in operating assets and liabilities:
Accounts receivable (312) (829)
Inventory 391 (1,861)
Prepaid and other current assets (2,087) (11)
Other assets (193) 183
Accounts payable 1,018 679
Accrued payroll and related expense (86) 477
Other accrued liabilities (968) (202)
------- -------
Total adjustments (102) 351
------- -------
Net cash (used in) provided by operating
activities (2,887) 1,747
------- -------
Cash flows from investing activities:
Purchases of property and equipment (3,019) (1,917)
Sales/purchases of investments, net 738 7,589
------- -------
Net cash (used in) provided by operating
activities (2,281) 5,672
------- -------
Cash flows from financing activities:
Proceeds from the sale of stock under stock
option plans 229 130
Reissuance/(purchase) of treasury stock 196 (2,324)
Principal payments under capital lease obligations (24) (24)
------- -------
Net cash provided by (used in) financing
activities 401 (2,218)
Effect of exchange rate changes on cash (42)
------- -------
Net decrease in cash and cash equivalents (4,809) 5,201
Cash and cash equivalents, beginning of period 6,169 4,681
------- -------
Cash and cash equivalents, end of period $ 1,360 $ 9,882
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 8 $ 10
Cash paid for income taxes $ 1,107 $ 746
Supplemental disclosure of non-cash investing
and financing activities:
Exercise of stock options $ 217 $ 33
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE> 6
FORM 10-Q
PART I
ITEM 1
PAGE 4
SUMMA FOUR, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three month
period ended December 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended March 31, 1998. For
further information, refer to the Company's consolidated financial
statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended March 31, 1997 and the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, filed
with the Securities and Exchange Commission. The year-end condensed
balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted
accounting principles.
2. INVENTORIES
Inventories, valued at the lower of cost (determined using the
first-in, first-out method) or market were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
----------------- --------------
<S> <C> <C>
Raw materials $2,242 $1,652
Work-in-process 1,378 1,795
Finished goods 1,043 1,622
------ ------
$4,663 $5,069
====== ======
</TABLE>
3. MAJOR CUSTOMER INFORMATION
Historically, a significant portion of the Company's net revenues is
derived from a limited number of customers. Approximately 29% of the
Company's net revenues for the nine months ended December 31, 1997
were from three customers accounting for 10%, 10%, and 9%,
respectively, of net revenues. Approximately 28% of the Company's net
revenues for the nine months ended December 31, 1996 were from three
customers accounting for 11%, 9%, and 8%, respectively, of net
revenues.
<PAGE> 7
FORM 10-Q
PART I
ITEM 1
PAGE 5
4. RECENT PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share." SFAS No. 128 establishes a different method of
computing earnings per share than was required under the provisions of
Accounting Principles Board Opinion No. 15, "Earnings per Share."
Under SFAS No. 128, the Company is required to present both basic
earnings per share and diluted earnings per share. The Company has
adopted SFAS No. 128 in its third (current) quarter for fiscal 1998
and all historical earnings per share data presented has been restated
to conform to the provisions of SFAS No. 128, where applicable.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement requires that
changes in comprehensive income be shown in a financial statement that
is displayed with the same prominence as other financial statements.
The statement will be effective for annual periods beginning after
December 15, 1997 and the Company will adopt its provisions in fiscal
1999. Reclassification for earlier periods is required for comparative
purposes. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the
statement requires only additional disclosure, the Company does not
expect the statement to have a material impact on its financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly
and entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets
and reports revenues. The statement will be effective for annual
periods beginning after December 15, 1997 and the Company will adopt
its provisions in fiscal 1999. Reclassifications for earlier periods
is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact this statement will have on
its financial statements; however, because the statement requires only
additional disclosure, the Company does not expect the statement to
have a material impact on its financial position or results of
operations.
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued the statement of position ("SOP") 97-2
"Software Revenue Recognition," which will supersede SOP 91-1. SOP
97-2 has not changed the basic rules of revenue recognition but does
provide more guidance, particularly with respect to multiple
deliverables and "when and if available" products. SOP 97-2 is
effective for transactions entered into for annual periods beginning
after December 15, 1997. The Company will adopt SOP 97-2 in fiscal
1999 and has not yet determined its impact.
<PAGE> 8
FORM 10-Q
PART I
ITEM 1
PAGE 6
5. CONTINGENCIES
On August 2, 1995, Claircom Communications Group, Inc. ("Claircom")
brought an action against the Company in King County (Washington)
Superior Court alleging breach of contract, breach of warranty, and
various related claims and seeking an accounting and damages arising
from the joint development of a cabin telecommunications unit (CTU),
which is part of a cabin communications system, to be installed in
commercial passenger aircraft for providing communications services
between the aircraft and the ground. On October 11, 1995, the Company
filed an answer in the Washington action denying Claircom's
allegations and asserted a Counterclaim. The Company also brought an
action against Claircom, in the Hillsborough County (New Hampshire)
Superior Court on September 12, 1995, seeking payment of royalties,
protection of its trade secrets and damages for breach of contract
under certain New Hampshire statutes. Claircom filed a Motion to
Dismiss or Stay the New Hampshire action. On October 12, 1995, the New
Hampshire court denied the Company's motion for preliminary injunction
and Claircom's motion to dismiss or stay. On October 30, 1995, the
Washington court granted the Company's motion to stay the Washington
action. Claircom's motions to reconsider the orders of the New
Hampshire and the Washington courts were denied. On May 9, 1997, the
Court allowed Claircom's motion to amend its counterclaims to add
claims for fraudulent inducement, intentional misrepresentation and a
claim under the New Hampshire Consumer Protection Act. The Company
moved to dismiss these new counterclaims, and Claircom moved to
dismiss, or for partial summary judgment on, the Company's claim under
the New Hampshire Consumer Protection Act. On August 28, 1997 the
Court dismissed both parties' consumer protection act claims, and
denied the Company's motion to dismiss the new fraud claims. On
November 25, 1997, Claircom moved for partial summary judgment on its
claim that the Company had converted its rights in the invention which
is now embodied in U.S. Patent No. 5,553,135. On January 27, 1998, the
Court denied that motion. The parties disclosed their experts on
December 8, 1997. On December 19, 1997 the Company moved to preclude
Claircom from offering testimony from its experts at trial. On January
15, 1998, the Court denied that motion. On January 9, 1998, Claircom
filed a motion to amend its counterclaims and to add a claim under the
New Hampshire Trade Secrets statute. The Company did not oppose the
motion, and the Court has not yet ruled on the motion . Discovery is
ongoing but will close on March 6, 1998. The Court has set a trial
commencement date of May 5, 1998.
On June 20, 1997 the Company commenced an action in the United States
District Court for the District of Delaware against AT&T Wireless
Services, Inc. and Claircom, Civil No. 97-335. That action asserts
that the defendants have infringed, and will continue to infringe, US
Patent Number 5,553,135 (the " '135 patent") owned by the Company.
Specifically the action contends that the defendants have violated the
'135 patent by making, using, selling or offering to sell cabin
telecommunications units employing the technology claimed and
disclosed in the '135 patent. The defendants have filed an answer and
counterclaim asserting that the '135 patent is invalid and not
infringed and that three individuals should be added as inventors on
the '135 patent. In addition, the defendants have filed a motion to
stay the patent litigation pending the outcome of the New Hampshire
legal proceedings. The Company opposes this motion. The Court heard
oral argument on the motion on November 24, 1997 and took the motion
under advisement. The suit is in its early stages, and the Company is
unable to express a view as to its outcome.
The Company, after consultation with external counsel, has estimated
pre-trial costs to be approximately $948 thousand and recorded the
costs.
<PAGE> 9
FORM 10-Q
PART I
ITEM 2
PAGE 7
SUMMA FOUR, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
December 31, 1997
The statements contained in this Quarterly Report on Form 10-Q which are not
purely historical are forward-looking statements within the meaning of Section
27a of the Securities Act of 1933 and section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. It is important to note that there are a number
of important factors that could cause the Company's actual results to differ
materially from those indicated in any such forward-looking statements. These
factors include, without limitation, those set forth under the caption below
"Factors That May Affect Future Operating Results".
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1996.
Net revenues decreased by $.6 million (5.2%) to $11.0 million for the three
months ended December 31, 1997 compared to $11.6 million, for the three months
ended December 31, 1996. Shipments to the Company's application developers and
reseller customers represented approximately 70% of revenues for the three
months ended December 31, 1997 compared to 62% for the three months ended
December 31, 1996. Shipments to international customers represented
approximately 31% of total revenues for the quarter ended December 31, 1997
versus 38% for the same quarter in 1996. The Company believes that its net
revenues may be adversely affected in certain periods preceding the introduction
of an enhanced version of its VCO 20 switch targeted for the fourth quarter of
fiscal 1998 and a new line of standards-based programmable switches targeted for
fiscal 1999.
Gross profit decreased by $.6 million (9.5%) to $6.1 million for the three
months ended December 31, 1997 compared to $6.7 million for the three months
ended December 31, 1996. Gross margin decreased to 55.1% in the three months
ended December 31, 1997 from 57.8% in the three months ended December 31, 1996.
The decrease in gross margin, when compared to the same quarter in the previous
fiscal year, was primarily attributable to a shift in sales mix to systems which
contain lower margin components, an increase in service revenues which typically
generate lower gross margins, and expediting and reconfiguration costs related
to delivery of production materials. The Company does not believe that the
current gross margins are necessarily indicative of future gross margins which
may be affected by the level of net revenues, customer mix, cost of components,
and discounts granted to high volume purchasers. The Company's gross margins
have been declining primarily due to increased use of indirect channels of
distribution.
Selling, general and administrative expenses increased by $.2 million (5.5%) to
$3.9 million, or 35.6% of net revenues, for the three months ended December 31,
1997 compared with $3.7 million, or 32.0% of net revenues,
<PAGE> 10
FORM 10-Q
PART I
ITEM 2
PAGE 8
for the three months ended December 31, 1996. This increase in expenses was
primarily due to increased travel, recruiting and consulting activities
attributable to the growth of the Company's sales force over the past year.
Research and development expenses were $2.9 million or 26.3% of net revenues for
the three months ended December 31, 1997 compared to $2.5 million or 21.5% of
net revenues for the three months ended December 31, 1996. The Company believes
that its current spending level on research and development is required to
advance its position as a core network supplier for telecommunications service
providers. Included are costs attributable to research and development directed
to the enhanced VCO/20 switch and, jointly with Dialogic Corporation and
Junction, Inc., a new line of standards based programmable switches.
Operating income decreased by $1.2 million to a loss of $.7 million for the
three months ended December 31, 1997 compared to a profit of $.5 million for the
three months ended December 31, 1996. The decrease was primarily due to revenue
shortfall related to lower domestic sales, lower gross margins and increased
research and development spending attributable to ongoing new product
development efforts.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH NINE MONTHS ENDED
DECEMBER 31, 1996
Net revenues for the nine months ended December 31, 1997 decreased by $2.4
million (7.3%) to $30.4 million, from $32.8 million for the nine months ended
December 31, 1996.
Gross profit decreased by $4.0 million (20.3%), to $15.8 million primarily due
to a decrease in revenues in the quarter ended June 30, 1997, the inventory
write off in the quarter ended September 30, 1997 and competitive margin
pressure, as compared to $19.8 million for the nine months ended December 31,
1996. Gross margin decreased to 51.9% during the nine months ended December 31,
1997 from 60.3% in the nine months ended December 31, 1996.
Selling, general and administrative expenses increased by $1.6 million (15.1%)
to $12.4 million, or 40.8% of revenues, for the nine months ended December 30,
1997 compared with $10.8 million, or 32.9% of net revenues, in the same period
of fiscal 1997. This increase resulted primarily from special charges for
anticipated Claircom legal expenses, other costs related to personnel and
severance activities, and expansion of the company's sales and support
functions.
Research and development expenses increased by $1.0 million (13.6%) to $8.6
million, or 28.1% of net revenues, for the nine months ended December 31, 1997
compared to $7.5 million, or 23% of net revenues, in the same period of fiscal
1997. This increase is primarily due to the Company's spending for research and
development directed to the enhanced VCO/20 switch, a new line of programmable
switches and additional product functionality as it relates to integrated SS-7,
network management, scalability, certifications, subrate switching and the
development of future products.
Operating income decreased by $6.7 million to a loss of $5.2 million, or (17.1%)
of net revenues, for the nine months ended December 31, 1997 compared to income
of $1.5 million, or 4.5% of net revenues for the nine months ended December 31,
1996. The decrease was primarily due to revenue shortfall related to lower
domestic sales, lower gross margins attributable to the special charge related
to inventory write-off, competitive margin pressure, shifts in system mix,
special charges for anticipated legal expenses and other costs related to
personnel and severance related activities.
<PAGE> 11
FORM 10-Q
PART I
ITEM 2
PAGE 9
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $26.7 million in cash, cash equivalents
and investments. At March 31, 1997, the Company had $32.3 million in cash, cash
equivalents and investments. This decrease is primarily due to severance
compensation, expenditures for capital equipment and expenditures attributable
to research and development efforts related to the Company's enhanced VCO/20
switch. At December 31, 1997, the ratio of current assets to current liabilities
was 4.2:1 compared to 3.3:1 at March 31, 1997. Purchase commitments to suppliers
of the Company's products were approximately $5.9 million and $9.7 million at
December 31, 1997 and March 31, 1997, respectively.
The Company maintains an unsecured bank line of credit in the amount of $6.0
million. At December 31, 1997, no borrowings were outstanding under this line.
Unless renewed, the line expires in September 1998. This line bears interest at
the bank's prime interest rate per annum (8.5% at December 31, 1997). The
Company believes that cash generated from operations and the total of its cash
and current investments, together with existing sources of debt financing, will
be sufficient to meet its anticipated cash requirements for working capital and
capital expenditures for at least the next twelve months.
On December 16, 1996, the Company's Board of Directors authorized the repurchase
of up to 500,000 shares of common stock as an extension of the Company's
repurchase program. As of December 31, 1997, the Company had repurchased a
cumulative total of 405,065 shares related to this extension at an average cost
of $10.16 per share and had reissued 26,933 shares at an average price of $7.68
related to purchases under its Employee Stock Purchase Plan. The repurchases
were funded through the Company's cash and investments. The Company has no
immediate plans to continue to repurchase shares but may elect to repurchase
additional shares of it's stock, at some future point, depending on stock market
conditions, price per share and other factors.
The Company does not consider the impact of inflation on its business activities
to have been significant to date.
<PAGE> 12
FORM 10-Q
PART I
ITEM 2
PAGE 10
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
A number of uncertainties exist that could affect the Company's future operating
results, including without limitation, the following:
o The Company has recently announced agreements in principle with
Dialogic Corporation and Junction, Inc. which it anticipates will
result in the development of a new line of standards based
programmable switches targeted for fiscal 1999. The Company
anticipates that the expenses associated with this developmental
activity will be funded from operations. There can be no assurance
that these products will be developed in a cost effective manner and
be available for sale within the time frame anticipated by the
Company. Failure to do so could have a materially adverse effect on
the Company's business and results of operations.
o The Company is dependent upon sole source suppliers for certain key
components used in its products. The Company purchases these sole
source components pursuant to purchase orders placed from
time-to-time. No assurance can be given that sole source suppliers
will devote the resources necessary to support the enhancement or
continued availability of such components or that any such supplier
will not encounter financial or operational difficulties. In addition,
in certain instances, components required for certain subassemblies
used in the Company's products are no longer being manufactured. The
Company has historically been able to secure such components by
utilizing its network of suppliers. However, the Company is
redesigning such sub-assemblies in order to eliminate production
interruptions that could occur if such components cannot be acquired.
The Company is actively seeking alternative solutions to address
potentially serious delays or shortages from its major component
supplier. If delays or shortages occur and the Company is unable to
effect alternative supply arrangements, its business and results of
operations could be materially adversely affected.
o A variety of factors could influence the level of the Company's net
revenues in a particular quarter, including general worldwide or
specific geographic economic conditions within the telecommunications
switching or other related industries, the timing of significant
orders, shipment delays, the introduction of new products by the
Company, the introduction of new products by the Company's
competitors, acquisitions by the Company, patterns of capital spending
by customers and other factors, many of which are beyond the Company's
control. Since a substantial portion of the expenses of the Company do
not vary relative to sales levels, if net revenues in a particular
quarter do not meet expectations, it could have a material adverse
effect on the Company's results of operations.
o The Company's gross margin has declined in recent periods as a result
of sales price variations, an increase in the relative percentage of
international and service revenues, and a shift in system mix to
systems which contain certain lower margin components. Gross margins
are also affected by other factors such as changes in the cost of
materials, production and quality considerations, and the timing of
new product introductions. The Company from time-to-time adds
functionality and features that could add cost to its products which
would adversely affect gross margins if the Company is not able to
increase the price of such systems to offset such increased costs.
<PAGE> 13
FORM 10-Q
PART I
ITEM 2
PAGE 11
o The Company's future results of operation and financial condition will
depend, in part, on its ability to obtain and maintain patent
protection for its products, to preserve its trade secrets and to
operate without infringing on proprietary rights of third parties.
There can be no assurance that the Company will be able to obtain
and/or adequately protect the intellectual property required for it to
compete effectively.
o The Company's ability to develop marketable products and maintain a
competitive position in light of continuing technological developments
will depend, in large part, on its ability to attract and retain
highly qualified management, technical and sales and marketing
personnel. Competition for the services of these key employees is
intense.
o The Company's international business is subject to a number of
inherent risks, including the challenges of building and managing
foreign operations, unique product requirements, fluctuations in the
value of foreign currencies, import/export duties, and unexpected
regulatory, economic or political changes in foreign markets.
Because of these and other factors, past financial performance should not be
considered an indictor of future performance.
<PAGE> 14
FORM 10-Q
PART II
ITEM 1-6
PAGE 12
SUMMA FOUR, INC.
Part II - Other Information
December 31, 1997
ITEM 1 - LEGAL PROCEEDINGS
On August 2, 1995, Claircom Communications Group, Inc. ("Claircom") brought
an action against the Company in King County (Washington) Superior Court
alleging breach of contract, breach of warranty, and various related claims
and seeking an accounting and damages arising from the joint development of
a cabin telecommunications unit (CTU), which is part of a cabin
communications system, to be installed in commercial passenger aircraft for
providing communications services between the aircraft and the ground. On
October 11, 1995, the Company filed an answer in the Washington action
denying Claircom's allegations and asserted a Counterclaim. The Company
also brought an action against Claircom, in the Hillsborough County (New
Hampshire) Superior Court on September 12, 1995, seeking payment of
royalties, protection of its trade secrets and damages for breach of
contract under certain New Hampshire statutes. Claircom filed a Motion to
Dismiss or Stay the New Hampshire action. On October 12, 1995, the New
Hampshire court denied the Company's motion for preliminary injunction and
Claircom's motion to dismiss or stay. On October 30, 1995, the Washington
court granted the Company's motion to stay the Washington action.
Claircom's motions to reconsider the orders of the New Hampshire and the
Washington courts were denied. On May 9, 1997, the Court allowed Claircom's
motion to amend its counterclaims to add claims for fraudulent inducement,
intentional misrepresentation and a claim under the New Hampshire Consumer
Protection Act. The Company moved to dismiss these new counterclaims, and
Claircom moved to dismiss, or for partial summary judgment on, the
Company's claim under the New Hampshire Consumer Protection Act. On August
28, 1997 the Court dismissed both parties' consumer protection act claims,
and denied the Company's motion to dismiss the new fraud claims. On
November 25, 1997, Claircom moved for partial summary judgment on its claim
that the Company had converted its rights in the invention which is now
embodied in U.S. Patent No. 5,553,135. On January 27, 1998, the Court
denied that motion. The parties disclosed their experts on December 8,
1997. On December 19, 1997, the Company moved to preclude Claircom from
offering testimony from its experts at trial. On January 15, 1998, the
Court denied that motion. On January 9, 1998, Claircom filed a motion to
amend its counterclaims and to add a claim under the New Hampshire Trade
Secrets statute. The Company did not oppose the motion, and the Court has
not yet ruled on the motion. Discovery is ongoing but will close on March
6, 1998. The Court has set a trial commencement date of May 5, 1998.
On June 20, 1997 the Company commenced an action in the United States
District Court for the District of Delaware against AT&T Wireless Services,
Inc. and Claircom, Civil No. 97-335. That action asserts that the
defendants have infringed, and will continue to infringe, US Patent Number
5,553,135 (the " '135 patent") owned by the Company. Specifically the
action contends that the defendants have violated the '135 patent by
making, using, selling or offering to sell cabin telecommunications units
employing the technology claimed and disclosed in the '135 patent. The
defendants have filed an answer and counterclaim asserting that the '135
patent is invalid and not infringed and that three individuals should be
added as inventors on the '135 patent. In addition, the defendants have
filed a motion to stay the patent litigation pending the outcome of the New
Hampshire legal proceedings. The Company opposes this motion. The Court
heard oral argument on the motion on November 24, 1997 and took the motion
under advisement. The suit is in its early stages, and the Company is
unable to express a view as to its outcome.
The Company, after consultation with external counsel, has estimated
pre-trial costs to be approximately $948 thousand and recorded the costs.
<PAGE> 15
FORM 10-Q
PART II
PAGE 13
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
The exhibits listed in the Exhibit Index are part of or included in
this report.
b. REPORTS ON FORM 8-K
None.
<PAGE> 16
FORM 10-Q
PART II
PAGE 14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Summa Four, Inc.
Date: February 11, 1998
------------------------------------------
Robert A. Degan
President and Chief Executive Officer
Date: February 11, 1998
------------------------------------------
Jeffrey A. Weber
Vice President and Chief Financial Officer
<PAGE> 17
FORM 10-Q
PART II
PAGE 15
Exhibit No. Description
- ----------- -----------
11.0 Statement Re: Computation of per Share Earnings
27. Financial Data Schedule
<PAGE> 1
EXHIBIT 11.0
FORM 10-Q
PART II
PAGE 16
Computation of Earnings Per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic
Average shares outstanding of
Common Stock 5,752 5,913 5,683 6,001
====== ====== ======= ======
Net (loss) income $ (310) $ 457 $(2,785) $1,396
Per share amount $ (.05) $ .08 $ (.49) $ .23
====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Diluted
Average shares outstanding of
Common Stock 5,752 5,913 5,683 6,001
Net effect of dilutive stock options-
based on the treasury stock method -- 137 -- 183
------ ------ ------- ------
Total 5,752 6,050 5,683 6,184
====== ====== ======= ======
Net (loss) income $ (310) $ 457 $(2,785) $1,396
Per share amount $ (.05) $ .08 $ (.49) $ .23
====== ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,360
<SECURITIES> 25,368
<RECEIVABLES> 10,803
<ALLOWANCES> 328
<INVENTORY> 4,663
<CURRENT-ASSETS> 42,056
<PP&E> 14,828
<DEPRECIATION> 9,549
<TOTAL-ASSETS> 54,156
<CURRENT-LIABILITIES> 10,005
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 43,345
<TOTAL-LIABILITY-AND-EQUITY> 54,156
<SALES> 30,416
<TOTAL-REVENUES> 30,416
<CGS> 14,636
<TOTAL-COSTS> 14,636
<OTHER-EXPENSES> 20,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (4,096)
<INCOME-TAX> (1,311)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,785)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
